How to do Business Analysis of Textile Companies – Dr Vijay Malik
Let us learn in detail factors affecting business of textile companies: spinning mills, fabric makers, apparel manufacturers and retailers.
Read the complete article here: drvijaymalik.com
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Let us learn in detail factors affecting business of textile companies: spinning mills, fabric makers, apparel manufacturers and retailers.
Read the complete article here: drvijaymalik.com
A thread:
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TLDR: Key points to focus on for textile companies:
1) Premium/value-added products: Whether it deals in commodity products or focuses on the premium and value-added segment. Premium players have a relatively strong business model.
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1) Premium/value-added products: Whether it deals in commodity products or focuses on the premium and value-added segment. Premium players have a relatively strong business model.
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2) Large and integrated operations: Whether it is a small-scale player or is a large player with a big manufacturing capacity and integrated operations. Large integrated players have a stronger business model.
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3) New modern plants: Whether its plants are new and modern or are old. New modern plants are cost-efficient. Moreover, old plants would need capital-intensive modernization to stay competitive.
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4) Diversified business with flexible production: Whether it is focusing on a single product segment or is diversified with the flexibility to use a variety of inputs and produce a variety of products. Diversification and flexibility in production process bring strength.
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The Indian textile industry is characterised by intense competition between numerous small-scale players. The whole industry is fragmented.
Large-integrated players constitute only a very minor portion of the industry.
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Large-integrated players constitute only a very minor portion of the industry.
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Most of the textile players, be it spinning mills, fabric or garment/apparel manufacturers produce commodity products, which are non-differentiable from each other; therefore, customers can easily switch from one supplier to another.
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The commodity nature of products has led to intense price-based competition between textile companies, which has taken away the pricing power of the companies. As a result, nearly all textile companies earn very low-profit margins.
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During economic downturns, and phases of raw material price increases, many textile players shut their businesses.
The business model is very fragile.
Only the largest players with economies of scale and low cost of production are able to earn sustainable profit margins.
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The business model is very fragile.
Only the largest players with economies of scale and low cost of production are able to earn sustainable profit margins.
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The spinning segment is highly capital-intensive with a large investment needed to install the mills and a large investment in inventory stocking during the cotton-harvesting period. It is a power-intensive business.
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Textile companies ompanies need to continuously spend money on the expansion and modernization of plants to make them more efficient. Until now, the capital and interest subsidies by the govt. have supported the capital expenditure by textile companies.
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Small-sized commodity yarn producers face many challenges to sustain their business under intense competition; however, large players, those who focus on value-added, premium yarn (high count range) are able to earn a high-profit margin and develop competitive advantages.
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Some yarn producers do vertical integration in contract farming, ginning units, fabric & apparel manufacturing to improve their profit margins. Some diversify to become flexible in using different inputs, produce fibre of different count ranges etc. to counter cyclicity.
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Fabric making is also a capital-intensive business; however, it has relatively lower inventory intensity because the good quality yarn is available throughout the year unlike cotton, which has harvesting seasons.
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Nevertheless, fabric making is also a commodity business where the pricing power is low and the business is susceptible to cotton and crude oil prices (for manmade fibre yarn).
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The volatility of profit margins of fabric makers is lower than spinning mills because, fabric makers do not have to stock yarn for full-year production and they produce fabric mostly after getting confirmed orders, which are priced after factoring in current yarn prices.
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A few fabric makers go for diversification into processing different types of yarn (cotton or manmade) and produce different kinds of fabric (GSM, colour, texture, wrinkle-free water/oil resistance etc.) to mitigate the impact of the cyclical business environment.
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To improve profit margins, fabric makers focus on premium segment with price-inelastic demand. Some sell fabric directly to consumers under own brand. It gives some pricing power to fabric manufacturers where they can pass on the increase in yarn costs to their customers.
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Some fabric makers also go for vertical integration into spinning mills as well as garment making to earn a higher profit margin. However, entering into spinning division is risky because it is much more capital intensive and has different inventory management dynamics.
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During lower cotton prices, an integrated fabric maker suffers losses on its cotton stock whereas a standalone fabric maker would benefit by buying cheaper yarn from the open market. So, most of the time, fabric makers do forward integration and not backward integration.
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Garment making and retailing have low fixed-capital intensive nature; but, it is raw material and labour intensive as stitching garments need a lot of manual intervention. Company needs to stock fabric and garments of different designs, sizes and colours to supply to shops.
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Unbranded garments are commodities where the companies do not have any pricing power. However, branded garment makers differentiate themselves by design and product quality. As a result, established brand companies have some pricing power backed by price-inelastic demand.
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Garment manufacturers produce clothes after getting confirmed orders and price them by factoring in the latest fabric/yarn/cotton prices. Therefore, the pricing power in the apparel segment is limited to established brands.
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However, it is not a very strong pricing power because all the brands whether Indian or International have to offer discounts and match them with the competitors to attract customers to their shops.
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To improve profit margins, garment makers also do vertical integration like extending into fabric production and yarn spinning. However, most of the time, backward integration is limited to fabric making because the control over fabric making serves most of the benefits.
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Also, he quality yarn is easily available. Moreover, spinning yarn is a capital intensive business with a lot of inventory stocking, which exposes integrated garment manufacturers to a lot of business risk.
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Apparel players prefer to stay asset-light because they can easily outsource garment manufacturing to capture a high demand and the low fixed-cost nature of the business helps them survive economic downturns better.
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We believe that if an investor focuses on these factors while assessing the business of any textile company, then she would be able to get a more realistic picture of its business strength.
Read the complete article here: drvijaymalik.com
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Read the complete article here: drvijaymalik.com
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